To begin this week’s newsletter, we look at the economic issues that China faces and the issues in Taiwanese domestic politics that will challenge its new president. Then, we examine the record highs that global financial markets have recently been hitting in spite of some signals of a potential upcoming recession. We then move to a discussion of the general election in the UK, which will be held on the 4th of July. To end this week, we examine the status of politics in Taiwan, Mexico, and India.

Chinese Economic Issues and Taiwanese Domestic Politics

Global corporate profits fall as China slump casts shadow 

Kensho Motowaki and Yusho Cho, Nikkei 

China Has a Plan for Its Housing Crisis. Here’s Why It’s Not Enough. 

Alexandra Stevenson, New York Times

What the China Pessimists Are Getting Wrong 

Yu Yong-Ding, Project Syndicate

Taiwan faces legislative showdown as China lashes out: 5 things to know 

Thompson Chau, Nikkei

Global corporate profits are feeling the pinch as China’s economic slowdown affects numerous industries. Net profit across roughly 24,600 publicly traded companies around the world fell 6% on the year to $1.11 trillion from January to March. The Chinese chemical industry has been boosting output despite limited domestic demand, contributing to excess inventory across Asia. Meanwhile, the steel and machinery industries have both suffered profit declines due to the economic situation in China. This decline underscores the interconnectedness of the global economy, with China’s economic woes reverberating across markets worldwide. Meanwhile, Taiwan finds itself embroiled in a legislative showdown between current president Lai Ching-te’s DPP and the opposition parties of KMT and TPP that are seeking to push forward controversial bills challenging the authority of the new president. These proposed laws include measures that would grant the legislature expanded investigative powers and control over substantial infrastructure funds in a manner that critics argue would flout the democratic norms of the modern Taiwanese political system and thus aggravate China. Beijing has been “lashing out” at Lai’s government, with the People’s Liberation Army announcing a sudden round of military exercises surrounding Taiwan.

Amidst these economic and political challenges, China’s property crisis is sending shockwaves through global markets, raising concerns about the stability of the world’s second-largest economy. Mounting debt and oversupply issues in China’s property market have investors on edge, with fears of potential ripple effects on global financial stability. While the majority of China watchers are bearish on its economic prospects some argue that the Chinese situation is not that bad and that the government should adopt expansionary monetary and fiscal policies as a means to bolster its economic growth and stimulate domestic consumption. However, the property crisis underscores broader economic challenges facing China and highlights the delicate balance of power in the region, as leaders navigate complex geopolitical dynamics while striving to maintain economic resilience amidst uncertainty.

Uncertain Economic Prospects As Markets Hit Record Highs

From Tokyo to New York, Stock Markets Are on a Record-Hitting Spree Around the World

Jan-Patrick Barnert, Alexandra Semenova, Geoffrey Morgan, & Michael Msika, Bloomberg

BofA’s Hartnett Says Stock Rally Is Moving Closer to Sell Signal

Sagarika Jaisinghani, Bloomberg

Treasuries Hit as US Sales Struggle to Lure Buyers: Markets Wrap

Rita Nazareth, Bloomberg

Stock markets around the world are hitting record highs, fueled by a healthy global economy, strong corporate earnings, and expectations of lower interest rates. The US market in particular has been on a tear, with the S&P 500 reaching new highs 24 times this year. Technology stocks like Nvidia have been a big driver of the US rally, but other sectors are also doing well. Europe is also experiencing a stock market boom, with the pan-European Stoxx 600 Index rising for five of the last six months. This is partly due to the expectation that the European Central Bank will cut interest rates before the US Federal Reserve. Other countries like Canada, Japan, India, and Australia are also seeing their stock markets reach new highs. This is due to a variety of factors, including rising commodity prices, government reforms, and economic growth. However, there are some concerns about the sustainability of the rally, such as high valuations in some markets.

Despite these record highs, experts from Bank of America believe that the global stock market rally may be overheating due to three factors: First, around 71% of stock indexes are trading above their historical averages, which may suggest that the market is overbought. Second, because the markets are optimistic about rate cuts this year if the Fed decides to hold rates over a longer period of time (or even raise rates), it could cause serious downward revisions in expectations. Finally, all major asset classes are being invested in, not just stocks, which could signal that the rally could be losing momentum. The US bond market is selling off after weak Treasury auctions and mixed economic data showing sticky inflation, but there are few signs of a potential economic slowdown. Investors are focused on the Fed’s future interest rate decisions, which some now expect to come in November or December this year.

July 4th UK Elections May End 14 Years of Conservative Rule

Rishi Sunak’s election call makes no sense, but is good news 

The Economist

Keir Starmer: ‘lucky general’ or hard-nosed political operator? 

Jim Pickard, Financial Times

Could the Labour Party blow its big opportunity? 

The Economist

Britain’s Prime Minister Rishi Sunak has called for a general election to be held on the 4th of July. The move surprised many analysts, as Sunak’s Conservative Party is currently trailing around 20 points behind the Labour Party, with many thinking his best chances were to wait to call the election until the end of the year, hoping that public opinion would come around. The Tories have been hammered by internal factionalism with its right flank, consumed by a controversial (and unlikely to materialize) scheme to deport refugees to Rwanda, and are still recovering from scandals such as parties held by party leadership in the midst of Covid lockdowns elsewhere in the country.

The Labour Party, led by Sir Keir Starmer, is in a vastly different position. Just three years ago, Starmer faced significant challenges as the party leader. However, in a remarkable turnaround, Starmer has transformed the party, taking on internal left-wing opponents, revising Labour’s rule book, and shifting political priorities to appeal to floating voters. His efforts culminated in the expulsion of Jeremy Corbyn, the former controversial left-wing leader. Despite critics dismissing him as a stodgy figure, opinion polls suggest he is now close to becoming the first Labour prime minister in 14 years. If the party wins, Labour will face deep-rooted challenges, including an anemic national healthcare system, fiscal challenges, and navigating Britain’s strained relationship with the rest of Europe. The party itself is terrified of letting victory slip through its fingers, with some recounting other times when parties enjoying strong polls ended up losing. The campaign will bring greater national focus on party leaders and its policy agenda, which could significantly influence the final showing this summer.

Taiwanese President Seeks Status Quo, While Modi’s and AMLO’s Domestic Popularity Masks Socioeconomic Issues

Analysis: Xi Jinping weighs options as Taiwan inaugurates a new president 

Katsuji Nakazawa, Nikkei

Mexico’s Politics of Bitterness 

Sarah Birke and Carlos Bravo Regidor, New York Review

Modi’s Middling Economy

Rohit Lamba and Raghuram Rajan, Foreign Affairs

Taiwan’s inauguration of a new president, Lai Ching-te, of the pro-independence party, the DPP, has the potential to significantly complicate the island’s relationship with mainland China. In his inaugural address, Lai stated that Taiwan would never “yield to or provoke China” in a rebuke to Xi Jinping’s pursuit of national reunification. As Taiwan asserts its sovereignty, Xi faces tough decisions regarding China’s approach towards Taiwan, with implications reaching far beyond the strait. Meanwhile, in India, Prime Minister Narendra Modi’s leadership is under scrutiny as the country grapples with a mixed economic performance. While Modi’s popularity remains high, attributed in part to his championing of the “Hindutva” agenda and economic achievements— India is now the 5th largest economy in the world—challenges persist in terms of inequality and unemployment. Despite advancements in infrastructure and welfare benefits, India struggles to create enough quality jobs for its young population. Criticisms include the government’s focus on manufacturing-led growth, widening inequality, and a decline in small and medium-sized enterprises while large corporations thrive. Advocates call for a shift towards investing in human capital to ensure a more inclusive and sustainable growth trajectory.

In Mexico, despite high domestic popularity, President Andrés Manuel López Obrador’s (AMLO’s) tenure faces criticism for constitutional manipulation and a decline in key public services despite his promises of transformation. His administration’s softer approach to security and attacks on independent institutions raise concerns about the future of Mexico’s democracy as his chosen successor, Claudia Sheinbaum, appears to be the most likely winner of the upcoming Mexican elections. Though he is quite popular, during AMLO’s tenure, cartel power grew, eroding the state’s power, corruption continued to run rampant, and declines in key public services like healthcare and education were felt by the Mexican populace, especially the most vulnerable. Sheinbaum is expected to continue many of AMLO’s influential policies, with a possible exception in regard to the transition to green energy, calling into question her independence and ability to improve Mexico’s precarious situation.